SaaS Spells Disruption for Partners, Report Says

By Kurt Mackie

09/26/2007

Change is a painful thing, and there's nothing like software as a service (SaaS) to inspire dread, especially among the IT partner community. A new study from IDC takes a look at trends happening now that likely will have a "disruptive effect" on the traditional channel partner model as SaaS begins to mature.

The IDC report, called "The Emerging SaaS Channel," predicts that SaaS will affect the revenue streams seen now in the traditional channel partner model. The relationship between the software solution provider and its partners will change because under the SaaS model, software is delivered directly to the customer.

"Two big wrinkles for partners are obviously the subscription revenue stream associated with SaaS solutions, as well as selling 'virtual' products where there is nothing to physically ship, implement, or keep on the shelf," stated Erin TenWolde, IDC's senior analyst, software as a service, in a press release.

The authors expect that value-added resellers will face particularly high hurdles under a SaaS model, especially when it comes to securing top revenues. In addition, the SaaS distribution model will remove some of the technical responsibilities assumed by partners. In response to SaaS, partners will need to become "more business-process oriented rather than technology focused," according to IDC's release.

"For traditional partners who have made their money on finding IT complexity and solving it, well a lot of that goes away with software as a service," Bibby said. "So, in its place, the smart partners are going to make money helping companies use the software-as-a-service application better. And that's going to come with some business process expertise."

Other areas of SaaS expertise for partners include sales and marketing, getting referrals, providing data integration and ISV application development support, he added.

On the matter of partner compensation, a white paper issued by the Software & Information Industry Association (SIIA) had earlier tried to spell out the percentages for partners under a SaaS model. The paper, "Channels for the New SaaS Industry," suggested that partners should be compensated with a 15 percent referral fee for the first year's recurring revenue. The report also suggested that contract renewals should get compensated at eight percent.

I asked the authors of IDC's report what they thought about such figures after conducting their research. The authors found that compensation for partners under SaaS is still not worked out very well.

"It's great that someone's putting some numbers out there because this all very nascent," Bibby said of the SIIA's white paper. "It was one of the big findings of the report when we talked to the software-as-a-service providers that we did. There's a lot of experimentation going on; there's a lot of trial and error. And a lot of the providers said, 'Hey, this is what we're doing today. It does not mean this is how we are going to run our channel plan in a year or in five years.'

In terms of the numbers [in the SIIA paper] -- they seem somewhat reasonable," Bibby continued. "But I think it all depends on the situation. We saw referral fees of up to 40 percent, but that was for a partner who was critically involved in a business applications implementation. So it all really depends on the partner's involvement."

Salesforce.com, a well-known provider of customer relationship management solutions via SaaS, and other SaaS solution providers have started to increase their partner ecosystems and focus on this partner question, TenWolde said.

"Up until recently, it's been more of a direct model, but now they need help in getting new customers, so they're really looking to the channel and partner relationships to help expand their reach in the overall software and service marketplace," TenWolde explained.

Figuring out partner compensation is taking time, even for solution providers like Microsoft that thrive on having a robust channel partner community in place. Bibby noted that it's been a year since Microsoft CEO Steve Ballmer announced at the Microsoft Worldwide Partner Conference in 2006 that Microsoft still needed time to figure out its Software Plus Service (SaaS) strategy and how it affects partners. Today, Microsoft "still doesn't have it completely together," he said.

In contrast to Microsoft, Salesforce.com didn't have any partner legacy when it launched its SaaS solutions, Bibby explained. It didn't have a channel that it had to protect. Salesforce.com was able to create what it wanted from scratch. And it still does not have a true resale program but instead offers percentage referral fees to its partners for bringing in the business.

"The Emerging SaaS Channel" report (IDC #208547) is available at IDC's Web site. The report examines SaaS channel strategies by software category and analyzes SaaS opportunities by partner type. It also looks at future challenges under the SaaS model.